How the credit card swipe fee settlement could cost you

Richard Barrington
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Richard Barrington
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How the credit card swipe fee settlement could cost you
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Visa and Mastercard reached a settlement to limit credit and debit card fees for merchants. This antitrust settlement announced last week was one of the largest in U.S. history. Even if you didn’t know what the lawsuit was about, the headlines were eye-catching:

  • Visa and Mastercard reach a $30 billion settlement with retailers
  • The agreement settled a suit that has been dragging on for 19 years

Beyond the massive amount of money involved and the drama of corporate giants doing battle for such a long time, the potential settlement could also affect consumers, especially those who use credit card rewards.

Although credit card customers were not a party to the lawsuit, they could come out on the losing end. Here’s why:

What are interchange fees?

At the heart of the battle are interchange fees, also commonly known as swipe fees.

These are fees merchants pay to credit card companies for processing their transactions. Whenever someone uses a credit card to buy something from a merchant, that merchant pays a fee to the credit card company. These fees are typically around 1% to 3% of the transaction’s value.

When applied to the trillions of dollars in credit card transactions that are processed every year, those small percentages add up to big money. A Federal Reserve study reported that annual interchange fees total over $40 billion per year.

Many consumers may have first become aware of interchange fees because of the recent trend of merchants adding a surcharge to their prices for customers who pay with credit cards rather than cash. Some state governments have cracked down on this practice, limiting the circumstances under which merchants can charge customers a surcharge for using a credit card.

In any case, such surcharges are not a great solution for merchants. They are awkward to implement, and annoy their customers. What merchants really want are lower swipe fees.

Why have retailers and credit cards been fighting over swipe fees?

Merchants have long complained that these fees are too high. While they are subject to negotiation between merchants and credit card companies, merchant associations have also sought to lower them by bringing lawsuits and lobbying politicians.

The merchants argue that interchange fees are unfairly high because there are very few processing networks for the transactions, and in any case credit card companies often prevent merchants from using competing networks.

For their part, credit card companies can point to the value they provide in exchange for those swipe fees, including:

  • Substantial investment in technology, which has increasingly made credit card transactions faster and easier.
  • Efficient credit card processing allows merchants to operate with a minimum of cash on hand, making those businesses more efficient and secure.
  • Credit card companies help protect transactions for the ever-growing challenge of cyber-fraud.

Since roughly 80% of credit card transactions are processed on either the Visa or the Mastercard network, merchants clearly feel the above benefits are worthwhile. What they object to is the price they’re paying.

Rather than simply bargaining for better terms, merchants have enlisted the courts and politicians to help them. That’s how this massive settlement proposal came about, and why there still may be legislation to control swipe fees.

How will the new settlement change swipe fees?

The proposed settlement still needs to be approved by the judge presiding over the lawsuit. Even if approved, it might not be the last word on the issue – legislation and/or other legal actions are still possible.

For now though, the proposed settlement would have the following impacts on interchange fees:

  • Visa and Mastercard would immediately lower swipe fees by 0.04%
  • Increases in swipe fees would be limited for the next five years
  • Merchants would have more flexibility to use surcharges or discounts to influence how customers pay for things

Court papers detailing the settlement estimate that the fee reduction will be worth $29.79 billion. It also might open the door to more competition, resulting in further fee reductions.

However, some critics are already saying that merchants did not get enough in the deal. That’s why rules concerning interchange fees may continue to evolve.

How will this affect consumers?

A central point of the argument merchant lawyers and lobbyists have used over the years is that lower swipe fees would allow merchants to lower prices for consumers.

That favorable outcome for consumers is by no means a sure thing. Meanwhile, there are also ways credit card customers could be hurt by the settlement.

The sections below outline three possible outcomes for consumers.

Lower prices on goods and services

Now that swipe fees have been lowered, will merchants pass these lower costs along to their customers?

Consumers have good reason to be skeptical. In 2010, part of the Dodd-Frank Act lowered interchange fees on debit card transactions. These are the same type of fees that the recent settlement proposal would lower for credit card transactions.

A few years later, the Federal Reserve Bank of Richmond looked at the results of a merchant survey to see how the change to debit card swipe fees affected retail prices.

What they found was that just 1.2% of merchants reduced customer prices. So, if the new court settlement lowers interchange fees on credit card transactions, don’t count on many merchants sharing those savings with their customers.

Higher fees or interest charges

Credit card companies have a few different ways of making money. Putting pressure on any of these sources of revenue can be like squeezing one end of a balloon – it just expands another part of the balloon.

So, if credit card companies face reduced interchange fees, they may look to make up the lost revenue somewhere else. There’s a good chance that will come out of the pockets of consumers, in the form of higher annual fees or higher interest rates.

Reduced credit card rewards

Interchange fees help credit card companies pay for the rewards they offer customers. Therefore, lower interchange fees could result in less generous rewards.

What to watch for

From a consumer’s standpoint, the proposed settlement doesn’t settle anything. Instead, it introduces new uncertainties that could impact credit card use for years to come. Recent actions and proposed rules limiting late fees and credit card rates had already threatened to create new pressures on the economics of the credit card industry.

That means consumers should watch carefully for changes to their credit card terms. This includes fees, interest rates and rewards benefits. Be prepared to shop for a new credit card if your current card makes unfavorable changes in its terms.

After all, credit card companies and merchants each have high-powered attorneys looking after their interests in the fight over interchange fees. When it comes to your interests, you have to look after yourself.

Richard Barrington
Cardratings Contributor

Richard has over 30 years of experience in financial services, including 23 years with the investment management firm Manning & Napier Advisors, Inc., where he led the Marketing Group and served on the firm’s Investment Policy Group and Executive Group. Over the years, Barrington has...Read more

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